G-10 bankers put a brave face on economy

By Batuk Gathani

BRUSSELS, JAN. 12.The world's most influential `Group of Ten' central bankers representing the largest economies have met in Switzerland and delivered an `upbeat' message on the prospects for the U.S. and world economy.

The bankers' strategy, ostensibly, is to boost confidence in the markets by reaching a unanimous conclusion that `soft landing' may be the outcome and `nobody is projecting a recession.'

These are ominous days for policy-makers in the most influential central banks, as the euphoria over the last week's dramatic interest rate cuts by the U.S. Federal Reserve - which poignantly highlighted growing weakness of its economy - dies down. The message from the bankers to nervous businesses and investors is that the U.S. move is no reason to panic, but share markets continue to decline both in the U.S. and continental Europe. A prominent U.S. merchant bank - Morgan Stanley D.W. - is the first major U.S. merchant bank to predict a recession in the U.S. in the first half of this year.

The dollar is also likely to fall in the next 12 months. This is reflected in the 16 per cent appreciation of the euro against the dollar over the past two months. While it may hold down inflation because dollar-related imports like oil and other goods will be less expensive in euro terms, a strong euro will also erode euro- zone manufacturers' competitive edge.

A weak U.S. economy already may threaten to slow growth in the 12 E.U. countries which have adopted the euro as their main trading currency, because one-fifth of their exports go to the U.S. There are signs of mild recession in the offing. For example, euro-zone global exports grew by 19 per cent in the last quarter from 24 per cent growth in the previous quarter. The silver-lining to the otherwise gloomy European economic horizon is that the oil prices are falling and the inflation rate has simultaneously fallen by 0.6 to 1.7 per cent compared to 2.3 per cent last year. Hence, the ECB sees no reason for big shift in its policy stance after last Wednesday's U.S. move.

The bank policy makers now rate slight fall in oil prices coupled with strengthening of the euro as a more important development. Against the U.S. slowdown rate this is rated as a positive factor. It is also argued that the E.U. can withstand an American slowdown, just as the U.S. was able to cope with the European economic slump in the early nineties.

The more sceptical perception in the European business and financial circles - albeit shared by a tiny minority - would suggest that the bank may be forced to take `major policy initiatives' if Europe is seen entering a period of deflation. But, European companies are not yet hedging against the rising euro by purchasing forward exchange contracts which lock in definite exchange rates.

The French Finance Minister, Mr. Laurent Fabius, says that euro could reach parity with dollar in the near future and could even surpass that level and many merchant banks today share this perception. The real debate is about the future of stock markets on both sides of the Atlantic. The outlook varies widely but most analysts agree that investors can expect much turbulence and advise them to fasten their seat belts as the global economy is seen slowing. The average mutual fund or unit trust investor has tumbled backward and it has been a disaster for technology- fund holders. For example, Lipper - a prominent U.S. firm which closely monitors progress of mutual funds reports that 60 per cent lost money in 2000 on varying scale.

The declining euro last year sent investors and capital flows flooding the U.S. The general view is that the trend could reverse this year and investments could flood the euro-zone countries if euro maintains its health.

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Section  : International
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